Siemens AG

XETRA:SIE

Earnings Call Transcript 2019-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to the Siemens 2019 First Quarter Conference Call. As a reminder, this call is being recorded.Before we begin, I would like to draw your attention to the safe harbor statement on Page 2 of the Siemens presentation. This conference call may include forward-looking statements. These statements are based on the company's current expectations and certain assumptions and are therefore subject to certain risks and uncertainties.At this time, I would like to turn the call over to your host today, Mrs. Sabine Reichel, Head of Investor Relations. Please go ahead, madam.

[Sabine Reichel, Head of Investor Relations]

Good morning, and welcome to our Q1 conference call. The earnings release and also Q1 presentation were released at 7 a.m. this morning. You can find everything on our website.Our President and CEO, Joe Kaeser; as well as our CFO, Ralf Thomas, are here this morning to review the Q1 results with you. The AGM starts right after this call, therefore, we will limit the time for approximately 45 minutes. Joe and Ralf will start with the brief presentation, and then we will have further time for Q&A. Joe, please.

[Josef Kaeser, Chairman of Managing Board, President & CEO]

Thank you, Sabine. Good morning, everyone, and thank you for joining us to discuss the first quarter results ahead of our AGM here in Munich.I just returned from Davos where I obviously met many customers, business partners and government representatives from across the globe. While the mood was skyrocketing in 2018, it was quite subdued in 2019. Discussions were centered around the impact of geopolitical uncertainties, such as Brexit and obviously trade tensions all around. But I really do hope, to serious hope that the Davos would never materialize in the subsequent year. We still need to be mindful about which effects global uncertainties may have for our customers around making investment decisions which they impact the business.On the bright side, we also do see quite a testimony that Siemens really matters to people and institutions everywhere in the world and how strong our brand has been recognized. Siemens is really well positioned as thought and competent leader in key areas, such as the fourth industrial revolution. The pundits are calling it the 4IR now, smart infrastructure and business to government. We have had great discussions with key stakeholders to develop trend approaches to businesses and people.As for our fiscal Q1, we have diligently been working on the implementation of the new company setup, which obviously is a prerequisite for a successful execution of our Vision 2020+. You know that we will have the Capital Market Days in May where we'll get further details on how to execute the goals we have been reporting to the public and to the capital markets in August.The business results for the quarter were, I would say, somewhat mixed. While increasing customer confidence and satisfaction with us is clearly visible on a continued very strong order growth, revenue and industrial profit was on the lighter side of our expectation. Thanks to a successful Mobility team and other contributors, we achieved the highest quarterly order intake since more than a decade.Among others, we booked a EUR 1.6 billion order with the first set of next-generation trains for London Underground. This order combines metro rolling stock with comprehensive fleet and digital services and offers potential for much more, I mean, much more going forward.Also, our Energy Management division, which is sort of disappointing on the bottom line performance, also appears with a very strong bookings record. Moray East is an offshore wind target, which connects the project in the U.K., has a capacity of 950 megawatts and is therefore Siemens' largest U.K. grid access project ever. And our Power and Gas division booked an order to build the most efficient power plant in the United Arab Emirates, bringing our H-class turbine in the region for the first time.Now let me maybe briefly touch on key financials of the first quarter before Ralf will go into more details. As mentioned, organic order growth was the highlight of fiscal Q1. A 13% order growth year-over-year led to a obviously great book-to-bill of 1.25 and a record high backlog of EUR 137 billion with a mostly healthy margin quality.As expected, revenues were up modestly 2%, with growth in many divisions, basically making good on the decline of the power generation, which was about 9%.Industrial margin business was -- excluding severance, reached 10.6%, however, broadly in line with market expectations, yet a bit shy of our own aspirations due to a miss in the EM division.Earnings per share, excluding severance, at EUR 1.34 was nominally lower to prior year, obviously, because that one benefited significantly from the OSRAM sale and the lower tax rate following the U.S. tax reform.Free cash flow had a slow start, which is typical for Q1, yet the cash conversion of 0.25 is not exactly what we like to see, and we definitely will have actions on free cash flow based on this one. However, we do expect it to catch up over the course of the year with a strong focus on working capital management in the company.Now Ralf will give you more details on the financials based on divisional highlights. Ralf, please.

[Ralf Peter Thomas, CFO & Member of the Managing Board]

Thank you, Joe, and also good morning from my side. Power and Gas continues to face tough market conditions. However, service remains a very stable contributor to top and bottom line. The team is making progress to execute on the announced capacity and structural adjustments.Orders were up 16%, driven by large contract wins in the service business and the pickup in oil and gas. This quarter, Power and Gas booked 1 large H-train (sic) [ H-class ] gas turbine in Middle East, 1 large steam turbine and 36 small and medium gas turbines, a particularly decent achievement which deserves being mentioned. The Power and Gas margin reached 4.6% ex severance. A loss of EUR 54 million related to the sale of a factory was offset by several positive effects due to stringent milestone achievements and project execution. Our expectation to achieve a low- to mid-single-digit margin, excluding severance, in fiscal '19 remains unchanged.Energy Management achieved a strong and broad-based pickup in orders, including Moray East, the grid connection project in the U.K. Joe mentioned before, and the large A3DC order as part of the ULTRANET project, one of the crucial North-South grid connections in Germany. However, the margin development was not satisfying, mainly due to negative effects from grid control project, which we closely monitor going forward. In addition, lower revenue and profitability in certain products impacted margin in the first quarter.Building Technologies continued its growth path. Profitability of 8.5% was temporarily softer due to weaker business mix with less product share carrying a higher margin. Building Technologies is also investing in smart building and IoT offerings to drive future growth and leverage recent acquisitions. As Joe already mentioned, Mobility delivered another excellent quarter with sustainable strong double-digit margin.Digital Factory showed again a very impressive performance. The team proves quarter-by-quarter the superior strength of combining comprehensive software offerings and leading automation competency. Year-over-year, orders were down, mainly due to tough comps in the software business after several large contracts at Mentor in the prior year's quarter, as discussed at that point in time with you. Book-to-bill was again clearly above 1, with a healthy backlog in short-cycle business supporting visibility for continuing decent revenue growth in the quarter ahead.In the first quarter, revenue was up 6% with clear growth contribution from the automation businesses. While automotive and machine tool industries saw some softness, other discrete and hybrid industries, such as electronics and pharma, showed healthy demand.Again, China was standing out with automation growth of 13%, driven by new customers from our dedicated growth initiatives. The software business grew north of 20% in China. However, as indicated before, we expect growth rates in China to further moderate due to tougher comps.In the short-cycle space, Germany held up well with 6% automation growth, Italy was up 5% and the U.S. declined by 3% on sluggish automotive investment. The underlying margin was around 22%, impacted by softer demand in the machine tool systems area and the less favorable mix.Severance and investment in cloud-based offering, Mendix as well as Mentor integration costs totaled around 340 basis points. They were partially offset by a gain of around 160 basis points from the sale of an equity investment. Exchange rate had a negative impact of 30 basis points in the quarter. Going forward, we expect to outgrow the market and deliver continued robust performance despite overall weaker investment sentiment.Process Industries and Drives achieved excellent and broad-based order growth of 15%. Commodity-related industries, such as mining or oil and gas, continued their CapEx-related recovery. We like to see that PD's profitability increase, and the resulting efforts are paying off.Margin also benefited in part from a positive revaluation effect of our stake in Bentley Systems. Our strategic companies, Siemens Healthineers and Siemens Gamesa, already reported their first quarter results yesterday. The performance below Industrial Business was in line with our expectations and the guidance we gave to you in November. To sum it up. We had a solid start in the first quarter with a seasonal weak cash flow. We confirm our fiscal year '19 guidance.With that, Joe and I will be happy to take your questions. And I return the microphone back to Sabine.

[Sabine Reichel, Head of Investor Relations]

Thank you. Operator, we will now start the Q&A.

[Operator]

[Operator Instructions] We will take our first question which comes from the line of Ben Uglow of Morgan Stanley.

[Benedict Ernest Uglow]

Thank you for giving a little bit of color there around the factory automation part of Digital Factory. I guess what I'd sort of like to know how your thinking is, if we look forward in 2019, that division or let's call it roughly half of Digital Factory historically has been quite sensitive to changes, Joe, as you've said many times in the macro backdrop. In your outlook, are you thinking that around 2019, you can sort of offset any weakness in automotive by ongoing strength in hybrid or pharma or other industries? Or do you actually think that over the course of this year, there could be some margin volatility in factory automation? I appreciate the software side and other things can remain good. But really, what I'm interested in is that factory automation part of Digital Factory. How do you think margins could trend this year?

[Josef Kaeser, Chairman of Managing Board, President & CEO]

All right. Thank you, Ben. I mean, obviously, the fact that the year, since short cycle within the year, especially factory automation, PLCs and the likes is sensitive to the economic investment was clear. We have been able, I believe, to sort of dampen the volatility through the spectrum, think about the whole PLM method simulation, Mentor Graphics and the like. We also know that we have quite a significant OpEx spend in our budget based on growth assumptions, but the money has not been spent yet, so there is some, let's just say, there's some potential here should they come to an unexpected drop. So what do we see? First of all, in general, obviously, the mood has been changing. Sentiment has got much more negative. Maybe that's even backed by perception base, and perception matters a lot if it comes to investment decisions. I think you should see that if -- in terms of geographics, we should see that first in the U.S., and then if at all, at a later point in China. But I believe that China has got sort of a special situation if it comes to eMobility, automotive, domestic industries. We have quite a demand, what we see, and we do not expect that demand to change in the current fiscal quarter, which I mean is fiscal Q2. We do see -- we do anticipate a slow demand more on the toolmaking, tooling area, robotics, things like that. Motion control would be the area that we could be affected with. That's a bit slower, clear, because that China exports a lot into the world, which obviously now is in debate. So that's where we see the geographical area. In terms of product, as I said, the robotics, motion control, toolmaking is we anticipate to be a bit slow. On the factory automation, software for Q2, we believe, are well underway. We don't know what happens in Q4, which is, in fact, we should need to make clear. From the numbers you've seen, derived from markets and competitors and the likes, shows that we are still rather winning market share, which is a good thing because that, at the end, matters that we do relative to the competition. So we are reasonably cautious, given the nature of the impact of short cycle, but also to see optionality going forward in big markets like China and, to a lesser extent, in the U.S.

[Operator]

And our next question comes from the line of Andreas Willi of JPMorgan.

[Andreas P. Willi, Head of the European Capital Goods]

I have a question on the Energy Management division, where we have seen some issues around project execution, so maybe you could elaborate on that and maybe provide some details around the margin decline. What's driven by a specific project and whether that's now completed in terms of impact on earnings? And you also mentioned tougher underlying trend, so margin pressure or margin decline in the grid products business. So what's going on there? And what do you expect the division to be able to do for the year? Obviously, you've got the good orders, but maybe you could also comment on some of the risk profile of these big projects like Moray East. How that compares to the risk profile of some of the larger orders you had in the past in that space?

[Ralf Peter Thomas, CFO & Member of the Managing Board]

Thank you, Andreas, for that question. Of course, we have been digging into the matter intensively and deeply throughout the last couple of weeks. And so first, for those who haven't been having an opportunity to listen in the press conference, the nature of those projects isn't the magnitude that you would know from the past. I described that in the mid double-digit million area, so the size of the project. And we have been identifying one of them that was technically, obviously, not under control. And we have been correcting the course, including the engineering work in that area, in a very restrictive way and have been putting resources into it, as described in the past. One of my colleagues on the board personally taking care of that over the Christmas holiday. So the poor guy has been looking into the matter and has been also having impact. So I'm quite confident that in that particular project, there will not be any major surprises. And the impact that we saw on the negative side was below the number that I have been describing before. On the product side, I may not have been precise with my wording. It was not a grid product. It was the high-voltage power transmission product area where we had a seasonally weak new orders in the past. We described that before. So the fabs were not running on the ideal level. That will level out throughout the next 2, 3 quarters again, and we also have clear visibility on the backlog. However, the nature of the product business being profitable has been leaving some space in that very first quarter. We will clearly see improvements in the next quarter when it comes to profitability. However, we will approach the target margin corridor from the South.

[Josef Kaeser, Chairman of Managing Board, President & CEO]

Yes, I wouldn't -- Andreas, ladies and gentlemen, I would not overrate the hiccup we had here in the EM division. This is in the digital grid area, which we know very well. We typically -- we have revenues there and revenues north of EUR 1.5 billion, typically double-digit margins. We very well understand the business. Probably from a market leader perspective, it's been trying to develop grid optimization projects with 2 of the grid operators in Germany, which obviously is relevant in the future as the whole strain of the multi-sourcing of energy with renewable comes to the grid. We're working with both on solutions, very custom-made. We both at the end agreed that we need to find a broader platform to do that and not to customize solutions for operator A grid, operator B grid and there's a third one, as you know, last operator C. So we pretty much know what's intended as we understand that business well. We agreed that we need to reset that whole topic of bringing more on the platform base and not custom-made stuff. This could have worked, but obviously didn't. So I believe we need to understand what it is, that's what we have, and our need to move on and bring it to a more platform-based approach. I think it's important to understand that this is nothing where what we do for the first time in a way digital grid is profitable double digit. Due to the effect in Q1, it was double-digit negative. In March, when we do expect Q2 to be double-digit positive, that's what the benchmark is and that's what we wanted to see.

[Andreas P. Willi, Head of the European Capital Goods]

And on the risk of the Moray East in terms of difference to the past projects in Germany and the North Sea?

[Josef Kaeser, Chairman of Managing Board, President & CEO]

No, no correlation at all. No correlation at all.

[Operator]

And our next question comes from the line of Alexander Virgo of Bank of America Merrill Lynch.

[Alexander Stuart Virgo, Director]

I wondered if I could squeeze a quick one in on Digital Factory with respect to just understanding the underlying growth in orders there. Obviously, the tough comp in Q1 affected the optical development in this quarter. So just wondering if you can comment on that. And then on building tech, I wondered if you can talk a little bit about the margin development there. Obviously, a lot of costs going in, as you mentioned, to IoT and smart buildings. I wonder what you could give us in terms of color for the trajectory for the rest of this year.

[Josef Kaeser, Chairman of Managing Board, President & CEO]

Yes. Alex, before Ralf goes into the 2 topics, congratulation on the promotion. Welcome to the community. I understand that you succeeded Mark in that capacity, so again, congratulations. Welcome, and look forward to working together.

[Alexander Stuart Virgo, Director]

Thanks very much.

[Ralf Peter Thomas, CFO & Member of the Managing Board]

Welcome also from my end, Alex. Starting with the Digital Factory, I'm not sure whether I got the core of your question, but the growth momentum that Joe has been discussing in the prior question is, a, build on a strong momentum in factory automation that we also clearly had in China, mentioned the 13% that we have been most likely also taking market share there in that very important market way forward. We also do have quite some good visibility now for the second quarter and maybe half of the third because we, at the moment, are sitting on the biggest backlog that we ever had in that business. And therefore, relative visibility is quite good and even better than we used to see that in the past. We also have a lot of respect of the responsiveness of the markets if they go through the -- into the other direction, therefore, Joe had been mentioning that we also have the impact particular on incremental spending, if need be. And we also stabilize, of course, in total, the Digital Factory with a growing share of our software business, which is quite resilient and was also fairly strong, in particular, in China with growth north of 20% in the last -- in the first quarter of the fiscal year. All that is giving us confidence for the second quarter and a certain extent of the third quarter. And as Joe mentioned, the fourth quarter, we need to wait also after -- before we see how the second quarter worked out with regards to Chinese New Year, which is always a bit of a question mark. But there is no indicator that I would know about, including the channels that it's channel stuffing or any artifacts that what we see at the moment and from all of what we heard so far about competitors, I think we are fairly well underway. When it comes to Building Technologies, I think we need to see the spending pattern in IoT and the likes in front of the backdrop that we have been making 3 minor acquisitions throughout the last fiscal year. In the third and the fourth quarter, we acquired 3 high-tech companies and lighted building robotics and trade 2 innovations. And typically, after integrating -- or with integrating them, you have to make dedicated investments in some areas to allow them fully unfolding their potential to contribute, and that's what they are currently doing. There was a slight dip in the product business as a portion of the total business mix, and that also had incremental downside then on the margin development that happens typically in the first quarter of the fiscal year, will not be indicative for the margin development in Building Technologies.

[Operator]

Our next question comes from Simon Toennessen of Berenberg.

[Simon Toennessen, Analyst]

I've got one question related to generally your guidance. Could you put Q1 a bit into context in relation to your margin and EPS guidance? At 10.6% margins, you're obviously below the 11% to 12% range. And if I look at recent years, your first quarter EPS ex severance is always accounted for 1/3 last year -- even for more than 1/3 of your full year earnings. So it had always quite a big weight. And just for Q1, obviously, you said it was a bit disappointing on the profit side. It's less than 20% of your EPS, if I take the midpoint of your guidance range. So I guess my question is, can you be a bit more concrete in which areas do you expect the catch-up to happen? And maybe as a sort of follow-on to that. Given it seems your [ late-effect ] business really starts to be boosting your backlog more and more, Q1, I think, is another good example here, how should we think about mix in the coming quarters ahead?

[Ralf Peter Thomas, CFO & Member of the Managing Board]

Thank you, Simon, for the question. I mean, first, let me get out of the way. The prior year's first quarter and EPS portion was, of course, materially impacted by the 2 extraordinaries of the U.S. tax reform, which we benefited from and disclosed by EUR 437 million, and the sale of our OSRAM stocks that had a pretax impact of EUR 655 million and EUR 645 million after tax. So that was materially impacting the first quarter, therefore, I think we need to take that out to put the current quarter into perspective. But you are right, we need and intend to improve in terms of performance. Already in the second quarter, we have been talking about Energy Management. And they have been taking measures, which take us to the conclusion that they will rapidly improve again in terms of margin levels even though, as I said, they are going to approach the target margin corridor from the South over the course of the year. They also have, for many years, a seasonality that makes the fourth quarter the strongest one. Obviously, you rightfully have been stating that the late cycle impact of Process Industries and Drives, we see the business developing quite nicely from the top line perspective for a couple of quarters already, which is now finally also reaching the bottom line. And so PD homework is not completed, but we have now proof points that they are on the right way and they are continuing along these lines. Also, BT, as I said before, a very stable contributor. And also, to put that into perspective in terms of the first quarter's profitability, we are still in the target margin range. And they are clearly heading to get into the double-digit margin range again any time soon. And with Mobility, we have a very stable contributor, I said that before, 21 quarters in a row now in or even above the target margin corridor or very, very close to it. That's quite a stable environment. For Digital Factory, I also -- I have been extensively answering Alex's question, so did Joe, in the beginning and have been up. I won't repeat all that. And in PG, we gave you clear guidance that we stay in the low- to mid-single-digit margin range. So with that, I think we have been describing the framework in which we operate. And again, with EUR 137 billion of backlog, and just to give you a rule of thumb, about 30% of that is going to turn into revenues in the current fiscal. We have quite some visibility and also very healthy margins in the -- or clear view on margin in the project business, and in particular, visibility in the service part of the PG portfolio.

[Operator]

And we will take our next question which comes from the line of Peter Reilly of Jefferies.

[Peter Reilly, Head of Capital Goods of Equity Research]

I wanted to ask, please, about the growth outlook for PG. You've had 5 quarters now of pretty good order intake, but the revenue is still declining at a fairly rapid pace in the first quarter. So can you talk about when you think revenue starts to bottom in Power and Gas or whether it's an issue that the order strength has been long-duration of service contracts, and therefore, we can't really look at the order strength and derive much confidence on just the near-term organic growth outlook?

[Josef Kaeser, Chairman of Managing Board, President & CEO]

Peter, obviously, we do like what we see on the order growth in Q1. And hopefully, we also like Q2. But if you look at fiscal 2018 and the 4 quarters, '18, 1, 2, 3, 4, you'll see orders developing minus 1.6% for Q1 '18, minus 7%, plus 54%, plus 13%. So what you actually see in Q1 is sort of a easy comp improvement. Could be same, let's say, the same area in Q2, obviously, also more easy comp, but in somewhat tougher comp area when we compare ourselves with the 54% growth we had in Q3 '18. So I think that's how you should sort of look at the top line order growth. Now on the revenue side, typically, the PG orders have big projects. Sometimes, even EPC contract-related ones, they go pretty long in the time where you see notice to proceed and subsequently, revenues. If you look at the backlog, and maybe Ralf can allude to that a little more, at the backlog, we have quite stable margins in the backlog of PG, which I think is relevant as to the potential volatility of the business going forward. And it may take some time until we see a like-for-like revenue growth. Fiscal 2018 had a decline of 14% in revenues year-over-year. We do expect '19 to have a significant deceleration of the decline. But whether or not that reach is already breakeven remains a question.

[Ralf Peter Thomas, CFO & Member of the Managing Board]

And Peter, with regard to the backlog, we got EUR 40 billion on backlog for PG at the moment. Around 80% of that is service with a very stable margin quality. Quality, we also discussed a couple of times. And I can confirm that there's no extraordinary cancellation or pricing pressure that would be extraordinarily burdening the service business and the renewals. So that's a very strong pillar for the next 6 to 8 quarters, as we said. And we are very diligently monitoring that and discussing with management. Whenever there are major renewals ahead, the 20% of new unit business, again, is in a very tightened price-intensive market. But also there, we don't see any major movements in the margin and the backlog at that point in time. And the teams are very diligently executing there. We just have been completing important milestones in our Egypt projects, which was quite helpful and also making us confident that we do have a firm grip around project execution, which is important. And as Joe said, the decline or the deceleration of the margin in -- of the revenue line for PG will come down. However, before we see the point of inflection, we need to be careful with our prognosis.

[Peter Reilly, Head of Capital Goods of Equity Research]

Okay. So now I take the point about the easy comps and the order growth. But if we look at the actual numbers, you've been running at about EUR 13-and-a-bit billion of order intake for the last 2 years now. It looks like you started this year in line with that. So my assumption is that the business there, the revenue trough at around about somewhere near the EUR 12 billion, EUR 13 billion range in terms of revenues, is that a reasonable assumption? Or is it just still a little bit too volatile in terms of the end-market dynamics?

[Josef Kaeser, Chairman of Managing Board, President & CEO]

Peter, honestly, it's almost like a lawyer's answer, it depends. It depends on the activity of the service portion, which we call the book and bill, which means we get the order and execute on the order in the same period. This is where we really make the difference in the end, whether you will be right or whether the pessimists or the payers are a bit more in front of the optimists. The answer is we just don't know. We do know that it's a very, very robust service offering. We do know that we are in quite a few sweet spots in service, especially on the H-class where we obviously have quite a market share. So many things will depend on what -- whether we'll be in areas where you need a lot of energy in cooling, what the service intervals will look like. I do not expect that the cooldown of the global economy will lead to a reduced demand on energy and, therefore, less service. I don't think it's way too early to go down that route. But we could be around of what you said, would be satisfactory if it's a bit less than what you've hoped for. It's probably also in the ballpark. So -- but around that area, we also believe that this could turn out to be for '19.

[Operator]

And our next question comes from the line of Jonathan Mounsey of Exane.

[Jonathan R. Mounsey, Analyst of Capital Goods]

Whenever we turn maybe to the future, on May, the Capital Markets Day, what we might hear on that day? Can you confirm whether or not we'll get an announcement around cost savings? Obviously, it's maybe an element that was missing from the initial announcement back last August. Could we see that addressed in May?

[Josef Kaeser, Chairman of Managing Board, President & CEO]

What you will see is that the details of the operating companies and the -- we'll address on how they are going into around their company and how exactly they are going to achieve the margin targets and the growth expectations which have been laid out in August. By the way, if you look at the August presentation, there have been quite a few areas where we said that cost savings need to materialize. If I remember it correctly, out of the top of my head, we said we would have at least 20% of efficiency improvements in selected -- in areas in scope, which is mostly related to corporate support environments. We said that we are going to install an effective service organization, which, once completed, will at least bring 10% to 20% efficiency improvement in that area. So that has been a framework which we set out as a minimum. What you can expect in May is that you get more precise actions on how that is going to get achieved. So that's what you can expect.

[Operator]

And our next question comes from the line of James Moore of Redburn.

[James Moore, Partner of Capital Goods Research]

A number of them have been answered, so maybe I can get back to the Digital Factory commentary. That was very helpful that you gave earlier, Ralf. And I think that you're talking about the regional short-cycle growth trends within the 6% organic sales growth. Obviously, I understand that the Mentor comparative and software has driven the minus 4% organic order growth. But I'm wondering if you could help us understand numerically a bit more momentum of how short-cycle bookings looks compared to the billings for the key countries.

[Ralf Peter Thomas, CFO & Member of the Managing Board]

Well, thank you, James, for the question. With regards to the new orders and the minus focus end, we said that last year, you may remember that we did have 3 major orders in Mentor Graphics right after we acquired them. They also have been contributing literally from day 1. So without -- if you take out Mentor effects of the prior year's quarter, the comparable order would have been slightly positive. But what I tried to express also was my discussion of what the picture is in the short-cycle business around the globe is, a, we are obviously overproportionately participating in the growth momentum in China, which, even though declining its momentum, is still on fairly high levels. I don't want to compare us now to competitors with another regional focus. But obviously, we are playing a bit above eye to eye with the disclosures we heard of yesterday. We do have the opportunity to tap on different verticals in different customer industries in those growth markets. And while automotive is kind of sluggish and while machine tool systems, as Joe said, is also not contributing to growth in some geographies, for example, in Germany, machine tool building is still moderately up in the first quarter. So the point I'm trying to make is we focus on opportunities in different regions, specifically for certain industries with dedicated sales stimulation programs, if you will. And we do have also, obviously, the right momentum when it comes to tapping on the potential of hybrid industries and also food and beverages, an area which is always helpful. When you look into the geographies, China -- and the environment there, China manufacturing shipments still expand with a clear growth rate but have been losing a bit of momentum throughout the last years. Machinery, there, still with moderate increases but below the manufacturing average. Automotive, I already discussed. So there is lower dynamics, but still relevant in terms of materiality on a global basis. I think everything is said about the U.S. already. And in Germany, manufacturing is still on a modest growth, partly even though in lower ranges. And machinery still is reporting also a moderate increase. So it's only automotive that is declining. So in a nutshell, there is a lot of different aspects in the market at the moment, and we are picking our opportunities and have obviously a grip around them. It's too early to compare in which markets we have been winning market share. But the overall figures, I was suggesting that in the growth markets, we are leading the pack.

[Operator]

And our final question comes from the line of Gael de-Bray of Deutsche Bank.

[Gael de-Bray]

I'll keep it short. The question is about process and drives that clearly stood out this quarter. So could you perhaps talk a little bit more about the drivers of the margin improvement? I mean, how much of this 300 bps margin increase can be attributable to volume growth versus the effect of cost-cutting and footprint rationalization program? And also, what was the effect of the revaluation of the stake in Bentley Systems in the quarter?

[Ralf Peter Thomas, CFO & Member of the Managing Board]

Gael, thanks for the question. It's hard to keep apart the footprint and the growth impact, of course, because the footprint change is facilitating growth opportunities which come from the market. And what we see is that in the commodity-related businesses on our customer base, we saw some stabilization in there in investment patterns just slightly. Also, the demand for renewable energy and wind power has been increasing again. And what you probably heard from the disclosure of Siemens Gamesa yesterday also, the pricing in their end markets is getting a bit more stable, which is good news for the suppliers into those businesses obviously. But at the end of the day, it is important for us that the homework that we have been doing and that has been completed to the biggest part is now bearing fruit. And we have a firm grip around the cost base and the quality of the output after that move of the footprint. We have been touching literally each and every angle of the organization, so this is a real proof point that the concept has been working out properly. And with regards to the impact of the Bentley stake and the revaluation of that, it's in the mid-double-digit million area. And if you took that out, we would still get -- be on a good trajectory to reach the lower part of the target margin corridor, in particular, taking into consideration that there was some 30 basis points of negative exchange rate impact in the quarter for PD too.

[Sabine Reichel, Head of Investor Relations]

Thank you. So thank you, everyone, for participating. Thank you, Joe and Ralf. We will now go to our AGM. You can also watch the live webcast on the Siemens via our Investor Relations homepage. And the team and I will, of course, be available for further questions. Thank you. Goodbye.

[Operator]

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen.Once again, let me repeat the instant replay numbers. Participants in Germany, please call the replay number [phone], access code 3576290#. Participants in Europe, please call the replay number [phone], access code 3576290#. Participants from the United States, please call the replay number [phone], access code 3576290#.This replay service will be available until tomorrow night. A recording of this conference call will also be available on the Investor Relations section of the Siemens website. The website address is www.siemens.com/investorrelations. Thank you.